Commentary and analysis on markets, personal finance, and wealth building from a contrarian perspective. "I believe in the discipline of mastering the best that other people have ever figured out. I don’t believe in just sitting there and trying to dream it up all yourself. Nobody’s that smart."
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Sunday, April 19, 2015

Smart money moving into distressed oil assets

But with West Texas crude prices now down by 50%, to $50 a
barrel, and many U.S. oil and gas companies scrambling for cash, Beal has been
quietly building an oil and gas lending team at his Texas bank, and though he
has yet to close on his first deal, he expects to pull the trigger soon. “We
are trying to get real active in the oil patch,” he says. “We’re looking at
some decent-size deals, hiring people–we are going to go after it.” According
to Beal, volatility will become the driving force in markets once the Fed
actually begins raising rates. But this will have little effect on the
inevitability of oil’s long-term price appreciation.

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Beal is not the only big investor on the hunt for bargains
in the oil patch. Hedge funds like Clint Carlson’s Carlson Capital and
billionaire Marc Lasry’s Avenue Capital have been raising new vehicles to
target the debt and equity of energy companies. Likewise the biggest private
equity firms have recently raised some $20 billion for energy sector
investments and are rushing to do deals. The Blackstone Group, for example,
just finished raising a $4.5 billion energy fund in February and is reportedly
raising another $1 billion to buy bonds and distressed loans of oil and gas
companies. Blackstone’s credit division recently committed $500 million to fund
drilling programs for Linn Energy and got an 85% working interest in some of
Linn Energy’s oil and gas wells in return. The Carlyle Group has about $9
billion marked for energy deals, and its co-chief, billionaire David
Rubenstein, recently said, “There is no other sector in the world that we are
as bullish on as we are on energy.”

Big money is doing what it always does. It moves in when sentiment is negative and everyone else gets out. Oil is vital for life itself, at least if you want to live in a modern industrialized society. It is a declining resource and requires constant high levels of investment to not only grow production but just to maintain it. With prices down investment is down and therefore supply will be constrained in the future. We just need to sit back and wait to get paid as the price of oil will be going up in the future.